Section 10(23D) of the Income Tax Act offers tax exemption to organisations involved in activities like education, medical relief, and charity. However, to qualify for this exemption, the organisation must operate without the intention of making a profit and be officially registered as a trust, society, or similar entity. Also, it must use its earnings only for the purposes for which it was established, like education or medical relief.
This tax exemption helps such organisations use more resources for their charitable activities instead of paying taxes. Let’s understand some key provisions of Section 10(23D) and study in detail the various conditions to be met for claiming exemptions.
What is Section 10(23D) of the Income Tax Act?
Section 10(23D) of the Income Tax Act provides tax exemption on the income earned by certain specified funds and institutions, mainly mutual funds and similar investment vehicles.
The main purpose of this section is to promote collective investment schemes that help channel small retail savings into productive sectors of the economy. Under this provision, any income earned by a mutual fund registered under SEBI (Securities and Exchange Board of India) Regulations, 1992, or by other notified institutions, is fully exempt from tax.
This exemption ensures that the returns investors receive from mutual funds are taxed only in their hands—not at the fund level—making mutual fund investments a tax-efficient option for individuals and institutions alike.
Also read: Income Tax Slabs for FY 24-25
Why was Section 10(23D) introduced?
Before Section 10(23D) was introduced, mutual funds and similar investment institutions were taxed on their income, which indirectly lowered investor returns. To remove this double taxation and encourage people to invest through mutual funds, the government introduced this exemption.
Under this section, income earned by specified entities such as SEBI-registered mutual funds is exempt from income tax, ensuring that investors are not taxed twice—once at the fund level and again when they receive returns or dividends. This move was aimed at promoting retail participation and long-term savings through professionally managed collective investment schemes.
Entities covered under Section 10(23D)
Section 10(23D) of the Income Tax Act provides tax exemptions to various types of organisations involved in specific activities. Let’s have a look at some main types of entities covered:
Educational institutions
The entities covered under this category are:
- Schools
- Colleges, and
- Universities
These establishments must be recognised by the government and operate on a not-for-profit basis.
Hospitals
This category includes:
- Hospitals
- Medical colleges, and
- Similar institutions focused on treating illnesses or injuries
Charitable institutions
This includes trusts, organisations, or institutions set up for charitable purposes like:
- Helping the poor
- Providing education, or
- Offering medical relief
Also read: Income tax return extended date for AY 2024-25
Conditions to claim an exemption under Section 10(23D)
To get a tax exemption under Section 10(23D) of the Income Tax Act, an entity must meet the following conditions:
The entity must be engaged in specific activities
The entity must be involved in activities like education, medical relief, or charitable purposes.
The entity must be a not-for-profit entity
The entity must not aim to make a profit. It should operate with a welfare motive and solely for the public good.
The entity must be registered
The entity must be officially registered under relevant laws, such as:
- The Societies Registration Act
- The Trusts Act, or
- The Companies Act
The entity must maintain books of accounts
The entity must keep accurate financial records and have them audited by a chartered accountant.
The income of the entity must be applied for the specified purposes
The money earned by the entity must be used only for the specific purposes it was set up for, like education, charity, or medical relief.
Also read: Direct Tax Code 2025
Benefits of Section 10(23D)
Entities that qualify for this exemption do not have to pay income tax on their earnings. Such an exemption allows these organisations to better use their resources to achieve their goals, whether it is educating students, treating patients, or supporting charitable causes.
Also, this tax exemption encourages the creation of new entities focused on:
- Education
- Healthcare, and
- Charity
That’s because “no tax liability” makes it easier for them to operate financially. Moreover, even existing entities can grow due to the financial relief provided by tax exemptions. It allows them to expand their services and reach more people.
Also read: Section 112A of Income Tax Act
Scope of activities
Section 10(23D) of the Income Tax Act covers a wide range of activities. This primarily includes:
- Educational institutions, such as universities, colleges, and schools, as long as they provide education and do not operate for profit.
- Medical institutions like hospitals and medical colleges if they are solely involved in treating illnesses or injuries.
- Charitable institutions that are established for purposes such as:
- Helping the poor
- Providing education
- Offering medical relief
Conditions for exemption
To make sure that organisations operate transparently and genuinely focus on their intended public service activities, Section 10(23D) of the Income Tax Act has laid out several conditions that must be met to qualify for tax exemption. These are:
Registration
The organisation must be officially registered under the relevant law, such as the Societies Registration Act, the Trusts Act, or the Companies Act.
Maintain books of accounts
The organisation must keep accurate financial records of all its transactions.
Audited accounts
These financial records must be reviewed and verified by a chartered accountant.
Use of income
The income the organisation earns must be used only for the specific purposes it was established for, such as education, medical relief, or charity.
Not-for-profit
The organisation must not be established to make a profit. Any income it earns should not be for personal or private gain.
Also read: Hindu Undivided Family Act
Exemption limits
It is worth mentioning that there is no maximum limit on the amount of income that can be exempt from tax under Section 10(23D). However, this tax exemption only applies to income earned from the specific activities for which the organisation was established. Any income from other sources will be taxed according to the usual tax rates.
Apart from Section 10(23D), there are several other provisions as well that offer exemptions to organisations operating with a welfare motive. These are:
- Section 11: Provides tax exemption to charitable and religious trusts if they use their income for charitable purposes.
- Section 12A: Offers registration to charitable organisations, which consequently makes them eligible for various tax benefits.
However, it must be noted that even if an organisation qualifies for an exemption under Section 10(23D), it still must:
- File an income tax return
- Maintain proper books of accounts
- Have its accounts audited by a chartered accountant
- Submit the audit report along with the income tax return
Moreover, recently, the government has taken steps to ensure that organisations claiming tax exemption under Section 10(23D) are following the rules. These measures include:
- Compliance checks that ensure entities meet the conditions for exemption
and - Transparency requirements which need such entities to disclose their sources of funding and how they are using their income.
Also read: Section 111A of Income Tax Act
Compliance requirements for mutual funds
Even though mutual funds enjoy a tax exemption under Section 10(23D) of the Income Tax Act, they must strictly follow several regulatory and compliance norms to retain this benefit:
- Registration with SEBI: The mutual fund must be registered under SEBI (Mutual Fund) Regulations, 1996.
- Annual filings: Every fund is required to submit annual reports, maintain financial disclosures, and comply with SEBI’s transparency guidelines.
- Mandatory audits: Regular statutory and internal audits are conducted to ensure accountability, proper fund management, and the legitimate use of tax exemptions.
Failure to meet these compliance requirements can lead to cancellation of the fund’s exemption status, exposing it to taxation like any other business entity.
Impact on investors
For investors, Section 10(23D) offers clear advantages:
- No tax at the fund level: Mutual funds do not pay tax on their income, which means the Net Asset Value (NAV) directly reflects the full returns generated by the portfolio.
- Tax applies only at withdrawal: Investors are taxed only when they realise profits, either through dividends or capital gains, not while the fund earns income.
- Boosts long-term investing: This tax efficiency encourages individuals to invest in mutual funds as a long-term wealth creation tool.
Challenges and criticisms
Although Section 10(23D) offers significant tax benefits and promotes investment, it is not without its challenges and criticisms:
- Risk of misuse: Certain funds may try to exploit the exemption by structuring operations in a way that stretches or misuses the intended benefits.
- Loss of government revenue: Exempting mutual funds from income tax means the government forgoes a substantial amount of potential tax revenue.
- Complex taxation for investors: While the funds themselves are tax-free, investors still face complicated taxation rules on capital gains and dividends, especially with frequent regulatory changes.
Conclusion
Section 10(23D) of the Income Tax Act exempts the income earned by non-profit organisations engaged in education, medical relief, and charity. By removing the tax burden, this section allows these entities to channel more resources into their intended activities and enhance their societal impact.
However, to qualify, organisations must be registered under the applicable laws, maintain books of accounts, and have them audited by a chartered accountant. They must also use their income solely for their specified purposes. Recently, to ensure better compliance, the government has issued some transparency requirements for such entities. Now, they are required to disclose the sources of their funding and how they are using them.
